Prices remain sticky even as crops thrive
One feature that has characterised global agricultural markets over the past few weeks is rising prices. The growing demand from China as the country rebuilds its pig herd, which was decimated by African swine fever, combined with dry weather conditions that adversely affected crops in Europe, have been the major price drivers.
The higher agricultural commodity prices are now visible in the FAO Global Food Price Index, which was up 5% year on year in September at 97.9 points. The grains subindex, which has underpinned the overall Global Food Price Index, was up 14%.
What’s more, with grain prices still at higher levels, we could see the Global Food Price Index remaining elevated in the coming months. On October 8, US maize, wheat and soya bean prices were up 25%, 32% and 21% year on year to $210, $274 and $439 a tonne respectively.
These price increases are largely a function of growing demand and the aforementioned weather concerns in parts of Europe, and not due to any major disruptions to global supply. The recent monthly update of the closely watched US department of agriculture (USDA) world agricultural supply and demand estimates report allays any potential market fears.
For example, the USDA forecasts 2020/2021 global wheat production at a record 773-million tonnes, up 1% year on year on the back of expected large harvests in Russia, Canada, Australia and Kazakhstan, among others.
Importantly, the increased global wheat volume bodes well for wheat-importing countries, such as SA. This also means the main wheat-producing countries have no reason to restrict exports in the coming months as they attempted to do at the start of the year amid fears over the effect of the Covid-19 pandemic. Nonetheless, prices will likely remain at higher levels as weather conditions in the northern hemisphere continue to threaten winter wheat sowing.
In more good news, the 2020/2021 global rice production is estimated at 501-million tonnes, up 1% year on year on the back of expected large harvests in key Asian producing countries.
Similar to wheat, SA takes a keen interest in the global rice production conditions as the country is a net importer of the commodity. The International Grains Council forecasts SA’s 2020 rice imports at 1.1-million tonnes, up 10% year on year. Global rice prices are, however, at levels higher than 2019, in part because of strong global demand across all grains driven by consumer stockpiling during lockdowns.
In the same vein, 2020/2021 global maize production is estimated at 1.16-billion tonnes, a 4% year-on-year increase, with Brazil, the US and Russia among the countries underpinning this large harvest.
In terms of oilseeds, the USDA forecasts 2020/2021 global soya bean production at 368-million tonnes, a 9% annual increase, boosted by improved yields across major soya bean producers in the Americas.
As with other agricultural commodities, the expected large soya bean harvest has not been reflected in prices, which are notably higher than the previous year, driven by growing demand from China.
Essentially, the higher global agricultural commodity prices we have witnessed in the previous months could remain with us for some time, at least as long as the demand from China remains solid. Already the global price increases have filtered into the SA market through higher domestic grain prices. This comes despite the country harvesting its second-largest maize harvest and third-largest soya bean harvest in history, and expecting the largest wheat harvest in a decade.
While this is positive for farmers as it improves their finances, the opposite is true for grain users such as livestock farmers and millers, and ultimately consumers. As things stand, the higher domestic grain prices are an upside risk to SA’s food price inflation, particularly into next year. But that said, I do not expect food price inflation for the year to exceed 5% year on year.
Written for and first appeared on Business Day, October 14, 2020.
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